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Do we have an EV bubble?

15 November 2021

Telsa has become the world's sixth most valuable company, with a market captitalisation of over a trillion dollars.

That's pretty good for a company that only really began shipping its products in volume a few short years ago.

This week, another EV manufacturer has effectively come from nowhere to become an investor favourite. Rivian hasn't even shipped a single vehicle yet and it has already attained a market cap of over 100 billion dollars, making it more valuable than automotive giants like Ford and General Motors.

These are scary figures and they show the incredible pace at which the world is transitioning its vehicle fleets from ICE to electricity.

Of course one can't help but wonder if there's not a degree of "bubble" involved in these valuations.

How on earth can a company that hasn't shipped a single vehicle be worth 100 billion dollars?

Well it's worth that simply because investors feel it's worth that, even though it has no earnings on which to calculate worth by way of the more conventional PE ratio.

This has many of the hallmarks of the dot-com boom, where companies were valued based on the promises they represented of future earnings.

I don't know that I'd be throwing huge sums of money into EV stocks right now, any more than I would have advised throwing large amounts of money at the likes of Yahoo! in the early part of 2000. Betting on unrealised promises is more like gambling than investing.

Having said that, you can make a huge amount of money from speculative investments like this... so long as you get your timings right. If you sold your internet stocks in February 2000 you'd have pocketed a fortune. A month later and you'd have been crying in your beer.

And so it may be with these EV stocks.

Whilst it's true that Tesla has done very well and is now generating profits, those profits are still fairly small for a company with a 1 trillion dollar valuation. $1.6 billion for the third quarter of this year may sound like a lot but it is a return on capital of just 0.6 percent.

Now I'm sure that fortunes have and will continue to be made by those who invest in EV stocks but, as I said, timing will be everything.

You'd also have to ask where the smart money should be going.

I'd probably be looking at investing in key technologies rather than individual vehicle manufacturers. Find something that all those manufacturers will need to build their EVs and you may find much richer and less risky returns on your money.

Battery technology is the obvious choice here.

Right now all the EV manufacturers are reliant on lithium ion battery tech to power their vehicles. The energy density, life-span and cost of this tech is unlikely to change a lot in coming years. It is already a pretty mature technology and any gains are likely to be more incremental than monumental.

I'd be on the lookout therefore, for new, emerging technologies that could be come game-changers.

If some smart startup invents and is able to commercialise a battery tech that offers significantly better battery performance then *all* the EV manufacturers will be lining up to buy or at least license that tech. Without that tech, a manufacturer would have a hard job selling their vehicles into what is already becoming a competitive marketplace.

Have you noticed that none of today's modern EVs are using lead-acid batteries for their main energy store -- despite the fact that lead-acid has been the mainstay of electricity storage systems for decades -- until lithium ion came along?

Well one day, lithium ion will become the lead-acid battery of the future. Too old, too heavy, too limited in capacity to be competitive as a primary storage mechanism for EVs. Who ever owns the next battery tech is going to become very rich.

Now of course, since I have no money to invest in anything at all, I'm safely sitting on the sidelines but I will be watching with great interest to see whether we get "the great EV bubble of 2025" or something similar.

What are your predictions?

Personally, I think now is the time to buy an EV, even though batteries will undoubtedly get better in the coming decade. An EV from 2021 is likely going to hold its value in the long term, perhaps even appreciating in value as a collector's item within a few short decades.

What's more, right now you'll get a government subsidy for buying most EVs and until they reach 5 percent of the total vehicle count, EVs won't have to pay any "per-Km" road tax so running one will never be cheaper than right now.

However, once again I shall sit on the sideline because my old 1994 Toyota ute remains the cheapest way for me to get around. Thanks to the large amount of walking I do, my spend on petrol is seldom more than $40 a month and the capital cost of even a second-hand EV would be very hard to justify.

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